The Success of Canada's Big Oil Sands Bet is Heavily Dependent on Innovation
Late 2014 marked the beginning of a long nightmare for many players in the oil and gas industry. In the years leading up to the oil crash, advancements in horizontal drilling and completion technologies made it possible to economically exploit large volumes of light oil from shale reservoirs previously thought to be unfeasible, particularly in the United States. This sudden growth in supply, coupled with a strengthening dollar and a slowing global demand for crude, ultimately set the stage for a dramatic price collapse where the WTI spot price fell from highs of $110/bbl down to a bottom of nearly $26/bbl.
While pundits continue to speculate as to when global crude demand will surge to stabilize the market, it is clear that commodity traders are still paying close attention to the supply side. It is not uncommon for the EIA’s weekly inventory report’s results to drive price fluctuations in either direction, nor is it surprising to observe knee-jerk reactions when OPEC makes a periodic announcement. One thing is for sure though – short-term volatility in commodity prices is a reality that we must live with.
The events that precipitated over the last few years have forced oil and gas companies around the world to rethink their strategies. We have seen many heavily leveraged companies file for bankruptcy and enter into receivership, and we have also observed many companies deploying drastic cost-cutting measures to preserve capital and protect their balance sheets. As well, numerous multinational oil companies, such as Royal Dutch Shell, Marathon Oil, and ConocoPhillips, have exited Canada by divesting their interests, leaving Canadian energy companies with the opportunity to gain greater exposure to oil sands assets.
By capitalizing on operational efficiency, banking on an eventual crude oil price recovery, and innovating, Canadian oil sands producers are hoping that their big oil sands bets will pay off.
Capitalizing on operational efficiency is the clear low-hanging fruit. In some cases, the Canadian company has bought-out a joint venture partner, so there are immediately cost savings that can be realized by decreasing overhead. In other cases, the Canadian company will simply be able to better operate the asset than the seller, either through a better understanding of how best to exploit the asset, or being able to operate the asset with a cheaper cost of production. The effects of these efficiencies are typically fully realized within one year of an acquisition.
Banking on an eventual crude oil price recovery is dependent on the operator’s macro-economic outlook and being right about it. Since this factor is largely out of the company’s control, it will not be discussed further.
Innovation is the key factor that will set the trajectory of Canada’s big oil sands bet. Actualizing success will require thinking outside the box and challenging the status quo to make changes in how business is traditionally conducted. The pace of innovating and adapting innovative technologies is completely within the oil and gas industry’s control – but how fast does the industry want to adapt?
Much like how horizontal drilling and completions technologies spurred the shale oil boom and caused global disruptions from the supply side, my belief is that a similar revolution will happen in the oil sands quite soon. This may take the form of technological innovation where companies discover ways to efficiently produce or process crude. This may also take the form of rethinking how to approach relationships within the industry, with government, and with civil society. Whatever lies ahead, it is my hope that the oil and gas industry adapts an approach that not only makes economic sense, but is also environmentally and socially acceptable.